The effect of managerial ability on product market competition and corporate investment decisions

2020 ◽  
Vol 11 (1) ◽  
pp. 49-69 ◽  
Author(s):  
Mahdi Salehi ◽  
Ali Daemi ◽  
Farzana Akbari
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Investment Decisions ◽  
Product Market ◽  
Corporate Investment ◽  
Free Cash Flow ◽  
Product Market Competition ◽  
Investment Efficiency ◽  
Managerial Ability ◽  
Content Type

Purpose This study aims to examine the effect of managerial ability on product market competition and corporate investment decisions, specifically, on risk-taking and investment efficiency. Design/methodology/approach The primary measure of managerial ability is Demerjian et al. model. In this study, Herfindahl–Hirschman Index is used to measure product market competition. Regression analysis is used to examine the association between corporate risk-taking and over-investment of free cash flow and product market competition and managerial ability. Findings Using firm-year observations from 2011 to 2015, the paper findings suggest that competition discourages managers to invest in risky investment. The study also found that managerial ability has no effect on the association between product market competition and investment decision. Originality/value The current study almost is the first study which is conducted on this subject; the results may give strength to further studies.

Product market competition and corporate investment decisions

2015 ◽  
Vol 14 (2) ◽  
pp. 128-148 ◽  
Author(s):  
Indrarini Laksmana ◽  
Ya-wen Yang
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Investment Decisions ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition ◽  
Term Survival ◽  
Content Type ◽  
Risky Investment

Purpose – The study aims to examine the association between product market competition and corporate investment decisions on, particularly, risk-taking and investment efficiency. Existing theoretical studies on whether product market competition mitigates or exacerbates agency problems are inconclusive. Prior research generally finds that competition constrains management opportunism in reporting operating performance. However, the association between product market competition and managerial investment decisions has largely been unexplored. Design/methodology/approach – The primary measure of product market competition is the Herfindahl–Hirschman Index. The authors use regression analysis to examine the association between corporate risk-taking and over-investment of free cash flow (FCF) (as dependent variables) and product market competition (as an independent variable). Findings – Using firm-year observations from 1990 to 2010, the authors find that competition encourages managers to invest in risky investment. They also find that competition disciplines management on its use of FCFs. Overall, their results provide support for the disciplining role of product market competition in management investment decisions. The results are robust after they control for shareholder activism and executive compensations. Originality/value – The paper contributes to the literature by providing evidence of the disciplining role of product market competition in management investment decisions. First, the results suggest that competition encourages managers to invest in risky investment. One potential explanation for the results is that competition reduces opportunities for resource diversion for management personal benefits and, in turn, decreases management risk aversion. Another explanation is that competition forces management to take more risks for the long-term survival of the company. Second, the results indicate that competition disciplines management on its use of FCFs. Although firms in highly competitive industries make investment decisions that are less conservative, they tend to avoid suboptimal investment decisions, such as over-investment of FCF, compared to their counterparts.

Financial statement comparability and corporate investment efficiency

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahmed Alhadi ◽  
Ahsan Habib ◽  
Grantley Taylor ◽  
Mostafa Hasan ◽  
Khamis Al-Yahyaee
Keyword(s):  
Firm Value ◽  
Market Competition ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition ◽  
Financial Statement ◽  
Investment Efficiency ◽  
Mediation Effects ◽  
Content Type ◽  
Large Sample

Purpose The purpose of this paper is to examine the relation between financial statement comparability and corporate investment efficiency of a large sample of US firms. Design/methodology/approach The authors use a large sample of US-listed firms from 1981 to 2013. The authors use several econometric methods including ordinary least square, firms fixed effects and mediation effects regression. Sensitivity tests that include the use of alternative measures of both the dependent and independent variables provide results that are consistent with the authors’ baseline model results. Findings The authors find that financial statement comparability mitigates risks associated with both under-investment and over-investment. They also find that product market competition mediates the relation between financial statement comparability and investment efficiency. The authors consider this to be a function of a competitive environment, whereby firms normally disclose less private information. This in turn reduces the effect of financial statement comparability on investment efficiency. Conversely, where there are higher levels of product market competition, it is less likely that firms will under-invest. Their results are consistent with these predictions. Originality/value The authors contribute to this growing field of research by providing evidence that financial statement comparability does in fact improve firms’ investment efficiency. Findings enhance our understanding of the relation between investment efficiency and financial statement comparability which is likely to have flow-on effects in terms of financial reporting quality and firm value. This study also contributes to research that links agency theory to financial statement comparability through an analysis of moral hazard and adverse selection tenets, and how it leads to reduced levels of investment inefficiency in a firm.

Product market competition, oil uncertainty and corporate investment

2020 ◽  
Vol 16 (5) ◽  
pp. 645-671
Author(s):  
Hussein Abdoh ◽  
Aktham Maghyereh
Keyword(s):  
Market Competition ◽  
Product Market ◽  
Corporate Investment ◽  
Oil Price ◽  
Product Market Competition ◽  
Price Uncertainty ◽  
Irreversible Investment ◽  
Content Type ◽  
Short Period ◽  
Lagged Dependent Variable

PurposeThe purpose of this study is to examine the effect of product market competition on the oil uncertainty–investment relation.Design/methodology/approachThe authors use firm-level financial data from the COMPUSTAT database, competition proxies from Hoberg and Phillips (2016) and macroeconomic data on crude oil price uncertainty. Corporate investment is measured as capital expenditure scaled by total assets or as the annual change in (net) total fixed assets plus depreciation. Since our panel data covers a short period (22 years) and the regressions include a combination of a lagged dependent variable and firm fixed effects, the authors apply Blundell and Bond’s (1998) GMM system when regressing corporate investment on the interaction between oil uncertainty and competition.FindingsConsistent with the theories in the irreversible investment literature, the authors first show that investments are negatively related to oil uncertainty. Second, they show that firms in competitive industries decrease their investments in response to heightened uncertainty by a higher degree than firms in concentrated industries, suggesting that competition can exacerbate negative investment outcomes when success is uncertain. The authors also examine how competition relates to investment asymmetric reactions to positive and negative oil price return volatilities and find a stronger negative relationships between competition and investment-positive oil price volatility, indicating that increasing the probability of a negative outcome due to uncertainty leads firms to reduce investment to a larger extent.Practical implicationsThe findings provide useful insights to guide corporate investment decisions under oil price change uncertainty. In particular, if firms can wait for the resolution of uncertainty before deciding to pursue irreversible investment in a competitive market, they can avoid potentially large losses by foregoing investment when the outcomes are unfavorable. This is because competition brings a greater uncertainty to firm performance if the investment outcome is poor, as firms in competitive industries share a large proportion of industry-wide profits with rivals and, thus, competition could erode profit margins and increases the likelihood of being driven out of the market. Hence, firms in competitive markets should balance between strategic preemptive motives and waiting for the resolution of uncertainty before deciding to pursue investment.Originality/valueThis study is the first to examine the effect of competition on the relationship between investment and oil price uncertainty. Moreover, it is the first to examine the effect of competition on the asymmetric response of investment to oil price uncertainty emanating from positive and negative changes in oil price.

Corporate governance, product market competition and firm performance: evidence from Iran

Humanomics ◽  
2017 ◽  
Vol 33 (1) ◽  
pp. 38-55 ◽  
Author(s):  
Mahdi Moradi ◽  
Mohammad Ali Bagherpour Velashani ◽  
Mahdi Omidfar
Keyword(s):  
Corporate Governance ◽  
Board Of Directors ◽  
Market Competition ◽  
Product Market ◽  
Research Literature ◽  
Product Market Competition ◽  
Governance Mechanisms ◽  
Management Performance ◽  
Content Type ◽  
The Board Of Directors

Purpose The purpose of this study is to investigate the effect of product market competition and corporate governance on firm’s management performance in the Tehran Stock Exchange market. According to the research literature, the governance mechanisms used in this study consist of ownership structure, structure of the board of directors and capital structure. In addition, Herfindahl–Hirschman Index and market size were used to measure the product market competition. Design/methodology/approach This study used one selected sample among the firms in the capital market of Iran from 2004 to 2012. Findings The results of this study indicated that there is a significant relation among the major governance mechanisms (including ownership concentration, independence of the board of directors and debt ratio) and product market competition and management performance. The findings of this study also showed that product market competition is effective on the relation between corporate governance and the performance, and this is what has been ignored in most of the conducted studies. Originality/value In general, the results of this study supported the idea that product market competition is effective on implementation and efficiency of governance mechanisms.

Help or resistance? Product market competition and water information disclosure: evidence from China

2019 ◽  
Vol 11 (5) ◽  
pp. 933-962
Author(s):  
Zhifang Zhou ◽  
Tao Zhang ◽  
Jiachun Chen ◽  
Huixiang Zeng ◽  
Xiaohong Chen
Keyword(s):  
Information Disclosure ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Competition Intensity ◽  
Ownership Type ◽  
Content Type ◽  
Industry Competition ◽  
The Government ◽  
The Relationship

Purpose This paper investigates the relationship between product market competition and firms’ water information disclosure and how firms’ ownership type can affect this relationship in China, offering new insights into corporate water management. Design/methodology/approach The authors investigated 303 Chinese listed companies in highly water-sensitive industries to examine how product market competition influences corporate water information disclosure by subdividing the product market competition into market competition at the firm level and the industry competition intensity at the industry level. Findings The results show that there exists an inverted U-shaped relationship between industry competition and water information disclosure; enterprises with the highest market power in a mildly competitive industry are more willing to voluntarily disclose water information and play an industry benchmarking role. Further tests demonstrate that the relationship between industry competition intensity and water information disclosure is stronger for state-owned enterprises than for private enterprises. Research limitations/implications The current water resources regulations in China are relatively lax and the water risk awareness of firms is weak, which may affect the applicability of the results. In addition, water information disclosure research is a relatively new field and a quantitative index system for water information disclosure is still in the exploratory stage. Further developments, including the selection, definition and measuring methods of a water index are required. Practical implications The authors developed a new direction of enterprise water management activities from the perspective of market competition. Based on the market conditions in China, the authors also investigated the impact of the ownership type of the enterprises on the relationship between market competition and water information disclosure. Social implications The authors suggested that the government should improve laws and regulations and adopt incentive mechanisms to encourage enterprises to implement water resource management. In addition, the government should encourage high market status enterprises to actively fulfill their environmental responsibilities so that the entire industry is encouraged to follow suit. Originality/value This study represents an important development in the field of environmental accounting and is the first research on corporate water information disclosure; it also extends the research on the influence mechanisms of market competition on the environmental management practices of enterprises.

Agency problems and the value of advertising expenditures in an emerging market: role of product market competition

2020 ◽  
Vol 46 (9) ◽  
pp. 1123-1143
Author(s):  
Omar Farooq ◽  
Zakir Pashayev
Keyword(s):  
Positive Impact ◽  
Emerging Market ◽  
Market Competition ◽  
Agency Problems ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Financial Firms ◽  
The Impact

PurposeThis paper documents the impact of product market competition on the value of advertising expenditures.Design/methodology/approachThe authors use the data for non-financial firms from India and the pooled regression procedure to test their arguments during the period between 2009 and 2018.FindingsThe results show that advertising expenditures of firms operating in sectors with relatively high competition are more valuable than advertising expenditures of firms operating in sectors with relatively low competition. The results of the study are robust across various proxies of advertising expenditures and firm performance. Furthermore, the results also show that the positive impact of product market competition on the value of advertising expenditures is confined only to firms that already have lower agency problems.Originality/valueThe results of the study highlight the importance of product market competition on the value of advertising expenditure in the emerging market setting, where agency problems are supposed to be high.

The impact of board characteristics on corporate investment decisions: an empirical study

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ben Kwame Agyei-Mensah
Keyword(s):  
Regression Analysis ◽  
Board Of Directors ◽  
Investment Decisions ◽  
Corporate Investment ◽  
Independent Directors ◽  
Investment Efficiency ◽  
Content Type ◽  
Board Characteristics ◽  
The Board Of Directors ◽  
The Impact

Purpose The purpose of this study is to investigate the influence of board characteristics on firms’ investment decisions. Design Methodology Approach The study used data sourced from annual reports of firms listed on the Ghana Stock Exchange from 2014 to 2018. Descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by a regression analysis which forms the main data analysis. Findings The multiple regression analysis results indicated that the proportion of independent directors and financial experts on the board are negatively related to firm investment. These findings imply that independent directors and financial experts on the board can help firms reduce overinvestment and improve investment efficiency. Originality Value The extant literature shows that the board of directors are an effective mechanism to reduce agency problems in firm decisions and operating performance. However, there has been little research on the role of the board of directors in corporate investment policy.

Product market competition, cash flow and corporate investments

2018 ◽  
Vol 44 (2) ◽  
pp. 207-221 ◽  
Author(s):  
Hussein Ali Ahmad Abdoh ◽  
Oscar Varela
Keyword(s):  
Cash Flow ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Growth Firms ◽  
Capital Spending ◽  
The Difference ◽  
The Impact

Purpose The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects. Design/methodology/approach The Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method. Findings The results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms. Practical implications The role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency. Originality/value Many firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

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